Year over year appreciation of Multi-Family units/fourplexes

[VicChung]

Dear REIN members,

Does anyone know if the year over year appreciation of Multi-Family units/fourplexes is less than residential family homes?

Recently, I approached my partner with a business proposal to purchase a five unit apaprtment block? My calculation assumed a conservative real estate appreciation of 8%. During our conversation, he strongly argued that for a five unit apartment block will only increase between 3-5% annually for the following reasons:

(1) There are less buyers for a five unit complex/multi-Family units/fourplexes
(2) A five unit apartment block will be located next to other rental buildings. Thus, any properties situated with other apartment blocks or rental units are less desirable and have a lower appreciation.

Any comments would be appreciated?

Thanks, Vic

 

[navaz]

One can argue any point they want. The old saying "a man convinced against his opinion is of the same opinion still". There are no hard and fast rules of capital appreciation. In the Edmonton/Calgary/Sask area multi family building went up a lot faster then single family homes because of condo conversion flippers.

Your point should be, short term anything can happen, but you are in for the long haul.

 

[Thomas Beyer]

Rental apartments are a function of cash-flow, i.e. a multiple of the gross rent or NOI (net operating income)

The multiple varies by market. This multiple is called a P/E ratio in the stock market or a yield or CAP rate in rental properties. The yield or CAP rate is the annual NOI divided over the price (or value) .. it is the inverse of the stock market P/E (price/earnings) ratio. Microsoft or IBM trades at about a 15 P/E multiple, so this would be a 6.67% CAP rate (100 divided by the P/E ratio). A boring utility company might trade at an 8 multiple or 12.5% CAP rate as little future earnings growth is expected. A highflyer like Google where much future "rent" (i.e. revenue) increases are expected trades at 50 P/E, or 2% CAP rate.

CAP rates rise and fall with size of cities, perceived riskiness of the city, the overall market, the bond rate and the expected future upside (or decline) of vacancies and rent levels.

Another factor to determine value is the ability to convert a multi-family buidling or 4-plex into condos. Does the city or province allow that .. for all buildings .. or just for some under certain conditions ? Is the suite size conducive to conversions ? Are there balconies ? Is there a view ? Are the suites in the basement really condo material ? What kind of renovations or reserve funds have to be put in place to sell a condo ? Then you MAY get a premium for your 4-plex as the rental income is less relevant as the condo profit potential, after you count all costs: vacancies, increased mortgage rates, legal conversion costs, surveys, sales commissions, upgrade expenses for exterior, common areas and interior of suites, reserve funds, coordination of all of these activities ...

A common CAP rate in a small town is 8-10%, sometimes higher, in larger cities 4.0% to 7.5%, but large variations exist due to expected, real or perceived future upside.

re your questions on value growth: 8% growth in values is on average TOO HIGH, as rents usually do not go up that much .. however there may be periods of time where this is too low and rent/values do go up this much or more. 4% growth rate is a better metric on average, slightly above inflation, slightly more in growth markets or "hot" markets where significant rental increases can be expected. In Edmonton, for example, rents went up 60% in 3 years, but prices of multi-family buildings well over 100%. This means either: there is room for rental upside, or the condo conversion potential is being factored in or that prices have risen too fast and will drop. The latter actually is happening. Prices used to be 125-140/door this spring, and now are down to around 105-120/door .. and may drop furtther before they start to rise again with rents.

Hope this helps .. if you need specifics on your 4-plex .. please feel free to send me some meaningful data like rent roll, operating expenses, area, quality of buidling, town .. and I will give you my view of value ..

 

[bonniemersereau]

I own a 5 unit apartment building... and the financing can be tricky as it is the Grey area between residential financing (up to 4 units) and commercial (6 units or more). Many lenders won`t touch the property because it is unique. We have it financed under residential financing with RBC (you deal direct with RBC not with a broker).

We have see good appreciation in Red Deer and much better cashflow than single family.

Hope that helps...

Bonnie

 

[VicChung]

QUOTE (bonniemersereau @ Dec 20 2007, 09:36 AM) I own a 5 unit apartment building... and the financing can be tricky as it is the Grey area between residential financing (up to 4 units) and commercial (6 units or more). Many lenders won`t touch the property because it is unique. We have it financed under residential financing with RBC (you deal direct with RBC not with a broker).

We have see good appreciation in Red Deer and much better cashflow than single family.

Hope that helps...

Bonnie


Thanks for everyone for your feedback.

Much Appreciated, Vic

 

[DennisEpp]

I felt compelled to respond to your question...but after reading your responses to date I do not need to. Thomas Byer has already answered your question very well. Good advise.

Dennis Epp